Earlier yesterday, we presented a webinar, “Tax Reform: What D.C.’s Actions Could Mean for Public Agencies,” that looked at how Congress’ actions in the next couple of months will impact such things as municipal bonds and state and local tax.

When looking at tax reform, and other major pieces of legislation, it is important to remember the natural tug-of-war that occurs between good policies and good politics. There are many provisions that the proponents of tax reform desired, such as changes to retirement and ability to encourage more savings; however, voters would not have supported the politics of this policy at the drastic turn that was initially proposed. Constantly, Members of Congress are weighing the balance of how to promote good policy while simultaneously promoting good politics – the two are not always harmonious.

One area of concern for local government is the municipal bond exemption. Before Congress can even engage in a discussion about such an exemption, there would need to be an agreement on how to pay for President Trump’s infrastructure plan and infrastructure in the future. While both tax reform and infrastructure are a priority of the Administration, the focus currently is on tax reform. Whether or not Congress makes a change to the Municipal Bond exemption, there is the possibility that the interest rate will have to raise to produce the same amount yielded currently. Congress may put caps on the amount.

The other area of concern for public agencies, especially in California, is that the proposal will eliminate the state and local tax deduction. This issue is believed to be one of the reasons the plan’s release was delayed from today until tomorrow, and has the potential to significantly impact state and local government funding. There has been pushback from Republican Members who serve in traditionally blue states, such as Illinois, New Jersey and California. These members have raised concern about a complete elimination of the state and local tax deduction. This concern was heard by committee and together they are working on a compromise. As of now, it looks as though a portion of the compromise will include the protection of the property tax exemption. Whether or not it is the property tax exemption, as we know it today, is yet to be seen.

Congress is moving forward on an extremely ambitious timeline, with the goal of having the President sign the plan by year-end.

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